CHEMICALS, PHARMACEUTICALS AND PACKAGING

The future of chemicals beyond fossil carbon

How can the chemicals sector shift away from fossil fuels while remaining competitive and supplying the industries society depends on?

THE CHALLENGE

Production remains hard to decarbonise

THE SHIFT

To low-carbon production

THE CHALLENGE

Fossil feedstocks still dominate

THE SHIFT

To low-carbon feedstocks

THE CHALLENGE

Linear systems keep the sector dependent on virgin sources

THE SHIFT

To circularity

THE CHALLENGE

Markets don't consistently reward lower-carbon products

THE SHIFT

To transparent markets

Chemicals are woven into nearly every single industry that shapes life as we know it. From the insulation that keeps homes warm, to the packaging that keeps food fresh, to the medicines that help people recover, chemicals are all around us, but we rarely think about their impact or how they are made.

This far reach gives the sector a central role in the transition of many industries across the economy and the processes they are built on. Yet the sector’s own fossil fuel dependence is one that remains hard to break.

Behind common chemicals like ethylene or ammonia lie energy-intensive processes that require high-temperature heat, which renewables can’t easily supply; fossil fuels that serve as both energy source and raw material, locking carbon into the products themselves; and long-running plants that are both costly and time-consuming to upgrade, let alone replace.

Still, pressure for change is building. New EU carbon border costs and rules for packaging and green claims are filtering through to chemical companies, turning expectations into obligations. Many customers need lower-carbon chemicals to meet their own targets. As emerging product passports make a product’s footprint visible to buyers, transparency is becoming a condition of doing business.

How the sector defines the future of carbon – and where it comes from – will shape its competitiveness while tackling climate change. Cleaner production, circular material flows, and trusted low-carbon products can strengthen resilience and create new sources of value; without coordinated action, the sector risks locking in high-carbon production systems and losing ground as markets and regulation move on.

In numbers:

"Chemistry sits at the start of almost every product we use. That makes transforming how chemicals are made one of the more powerful, yet less visible, ways to decarbonise everything else."

Marta Iglesias, Global Practice Area Head, Manufacturing and Industry The Carbon Trust

SHIFTING PRODUCTION

1. Production remains hard to decarbonise

Much of the chemicals sector’s energy use and emissions comes from a handful of foundational processes. Seven base chemicals, including ethylene, propylene, methanol and ammonia, consume about 74% of the sector’s heat and feedstock energy and account for 52% of its CO2 emissions.1 Steam crackers operate at around 850°C to produce ethylene and propylene, illustrating the demanding conditions behind some of these processes.

This concentration might appear to simplify the transition: change a relatively small number of processes and emissions fall across much wider value chains. In practice, those processes sit within capital-intensive, highly integrated plants built to operate for decades. Retrofitting one unit can require changes to equipment, energy supply and infrastructure elsewhere, while taking critical production offline can disrupt customers far beyond the plant.

As it stands, these processes need to change within long-running plants that will remain in use. Changes must be introduced while production continues and without compromising the product specifications or volumes customers rely on.

30 years

The typical lifetime of a chemicals asset.

Source: IEA

6 GtCO2

The extra energy-related emissions if the chemicals sector's transition is delayed by five years.

Source: Modelled by the One Earth Climate Model, via PwC

$135 million

The investment used to retrofit a major industrial complex in Germany with a 54 MW green hydrogen electrolyzer, capable of producing 8000 tons of clean gas and avoiding 72,000 tons of CO2 emissions annually.

Source: BASF

The shift to low-carbon production

For many chemical companies, the different pathways available to them pose both risks and opportunities. Transition, and high technology costs and varying technology readiness can make the shift to new production processes difficult. Delay action, and risk remaining reliant on fossil fuel assets at a time when industry begins to face regulatory pressure to report and reduce emissions, and when energy prices remain highly volatile.

Transition strategies that take the cost of inaction as well as the required investment into account, map emissions and energy use across plants and production lines, and model opportunities for phased decarbonisation, can identify where action can be taken today, where further investment is required, and which routes present the best case for both emission reductions and continued competitiveness. This involves assessing the role of energy efficiency, low carbon heat, electrification, fuel switching, process innovation and CCU at each site and aligning investment plans with existing maintenance and replacement cycles. For example, a producer may be able to electrify lower-temperature heat now, while CCU/S may remain necessary for emissions that cannot be addressed through fuel switching alone.

Producers who take this on are more likely to be in a position to decarbonise in a way that maintains their competitiveness today and in the future. A strong transition strategy will have credible reduction targets alongside a clear plan for how those targets will be funded and achieved. It allows plans to be adjusted as technologies, infrastructure and the market evolve. To put it simply, in a sector where assets are designed to operate for ~30 years, transition planning enables producers to act in the face of uncertainty rather than waiting for that uncertainty to go away.

SHIFTING FEEDSTOCKS

2. Fossil feedstocks dominate

The chemical industry is doubly reliant on fossil fuels, both as the fuel that powers production processes and as the basis for chemicals’ carbon feedstocks, or raw materials. Even a plant running entirely on renewable power could still be turning fossil carbon into product. Replacing fossil-fuel-derived ingredients in feedstocks is one of the most impactful steps the industry can take, as more than 90% of the carbon embedded across the chemical value chain originates from virgin fossil sources.2 For plastics, this is even higher. Roughly 99% of newly manufactured plastics come from fossil fuel feedstocks while alternative feedstocks are far from achieving comparable scale. Bio-based plastics currently account for only around 0.5%.3

Alternative sources are emerging, but there is no single pathway to replace fossil feedstocks across the sector. Producers face choices between recycled, biogenic and captured carbon, each at a different stage of technical and commercial development. Their suitability also varies by product. Any alternative must meet exacting quality, safety and performance requirements while remaining available at sufficient and consistent volumes.

Chemical producers have to choose before it is clear which pathways will scale. Switching feedstocks may require equipment changes, retooling a plant, new suppliers and extensive product testing, only for the alternative to fail specifications or prove difficult to source at scale. Characteristics such as colour, purity and consistency may further restrict where recycled materials can be used, while emerging feedstocks may rely on infrastructure and supply chains that are not yet firmly established.

Producers and suppliers remain at an impasse. While producers seek assurance of reliable alternative feedstocks before changing systems, suppliers require guaranteed demand before investing in capacity. Until this changes, fossil feedstocks risk being seen as the safer option, at a time when regulations, carbon costs, and supply challenges increase.

99%

Roughly 99% of new plastics still come from fossil fuels. Despite its potential, <1% is created from bio-based feedstocks.

The potential for alternatives is there:

62%

Up to 62% of all feedstocks used in the chemical sector could be provided by alternative sources by 2050.

Source: Nature Communications

47 Mt

Projected global production capacity for bio-based and biodegradable plastics by 2030, roughly double the 2.3 Mt in 2025.

Source: European Commission

The shift to low-carbon feedstocks

The real opportunity for the chemicals sector to decarbonise and remain competitive lies in the transition to low-carbon feedstocks. Supply and demand for alternative feedstocks will have to grow in parallel, so chemical producers can start making the switch at scale. Several actions can help:

1. Scale the supply chains behind alternative feedstocks. Each pathway faces its own barrier. Recycled carbon, for example, needs collection, sorting and chemical recycling infrastructure that is commercially viable, while bio-based carbon needs dependable, sustainably sourced supply. Captured carbon still needs further technology development and supporting infrastructure. Scaling these supply chains will require investment before demand is fully established. Early commercial projects and partnerships can prove that technologies work and that a market exists for their output, reducing the risk of investing in further capacity.

Clear long-term policy signals also add confidence. If the EU’s Packaging and Packaging Waste Regulation were to count bio-based content towards its targets, for example, investment in bio-based polymers would become less risky.

2. Apply a mass balance approach. Chemical plants process fossil, recycled and renewable inputs through the same integrated systems, where individual inputs can no longer be physically traced to a particular end-product. Building fully separate supply chains for alternative feedstocks is difficult and, while supply remains limited, often uneconomic.

Mass balance offers a practical way forward. Alternative inputs are introduced into existing production alongside fossil feedstocks, their quantities are tracked, and their benefits are allocated to selected products. In this way, producers can begin substituting fossil carbon without full segregation, new production lines or a complete switch, and progressively increase the proportion of alternative inputs as supply and demand grow. This also enables customers to buy differentiated products associated with alternative feedstocks, thus giving suppliers the demand signals they need.

The credibility of this approach depends on clear, certified allocation rules, so that each claim is backed by alternative inputs actually entering the system. An example of this can be seen in BASF, which uses mass balance to assign lower-carbon inputs, such as recyclate and bio-based feedstocks to its product portfolio.

3. Ensure accounting recognises alternative carbon. Alternative feedstocks will only influence investment and purchasing if their benefits are clearly shown in product footprints. Accounting rules do not always fully reflect the climate benefit of biogenic carbon, which makes it harder for producers and customers to see the value of switching. Braskem, together with the Carbon Trust and partners, is pushing for changes to Scope 3 and product footprinting rules, so that carbon absorbed as biomass – and released later in a product’s life – is recorded in a consistent way.4

Independent assurance of these footprints and claims then gives buyers more confidence.

4. Coordinate decisions across the value chain. Producers will be reluctant to invest in alternative-feedstock capacity without confidence that customers will buy the resulting products. Long-term procurement commitments and offtake agreements can guarantee demand even when alternative feedstocks carry a premium and making new capacity easier to finance.

Getting buyers on board means showing them the benefit: lower emissions embedded in their own products. Calculating the expected product footprint before an investment is made can give producers and customers greater confidence in the reductions such a switch could deliver, and a basis for committing early.

"Mass balance is a bridge, not an end point. It allows alternative feedstocks to reach customers while the supply chains behind them are still being scaled up."

Jack Judd, Chemicals Sector Lead The Carbon Trust

SHIFTING LINEAR SYSTEMS

3. Linear systems keep the sector dependent on virgin sources

Most chemical products are used only once. We make plastics, synthetic fibres, coatings, and adhesives from fossil carbon, use them in clothing, buildings, and cars, which are then too often burned, buried, or lost to the environment. Every material lost means the chemicals within it are lost too, causing chemical producers to rely on more fossil-fuel-derived feedstocks to create new products.

In 2022, the world made 400 million tonnes of plastic, but just 9.5% came from recycled sources.5 If nothing changes, global plastic waste could almost triple by 2060.6 Plastic is just the most obvious example. Chemical materials are often combined in ways that are hard to separate when products reach the end of their life.

This continued reliance on virgin fossil feedstocks also creates business risk. When shipping through the Strait of Hormuz was disrupted in March 2026, the price of naphtha in Asia jumped from $776 a tonne to more than $1,000 in just a single week, driving up ethylene prices.7 Chemical producers in Europe also responded with surcharges and price rises of up to 30% on products, citing higher costs.8

Keeping materials in circulation would change that, by designing products for reuse, repair and recovery, and returning materials to production as secondary feedstock. Circularity could reduce demand for primary chemicals by around 20%, avoiding an estimated $1 trillion of the investment needed to decarbonise production.9 Yet progress is slowing in some areas. In Europe, growth in circular plastics production fell from 13.6% in 2022 to 1.2% in 2024.10

Products and materials are not consistently designed, identified or managed for recovery, from black plastics that many sorting machines cannot detect, to packaging that bonds card, plastic and aluminium together. Collection and sorting systems vary widely across countries while the material that is recovered often lacks the purity chemical producers need.

Fragmentation across the value chain compounds these barriers. Chemical producers set material specifications, converters and manufacturers decide how materials are combined, and recyclers determine what can be recovered, each making investment and purchasing decisions in relative isolation. Until those decisions are coordinated, valuable material will keep becoming waste rather than the raw material for the next product.

20%

Circularity could reduce demand for primary chemicals by around 20%, saving an estimated $1 trillion in the capital expenditure neeed to abate the sector.

Source: World Economic Forum

The shift to circularity

Whether materials can return to chemical production is largely decided in the design phase, long before materials become waste: in the choice of polymers, additives and material combinations.

Recovering these materials as secondary feedstock offers a significant opportunity. Under the IEA’s Net Zero scenario, secondary production would need to rise from 8% of plastics production in 2022 to 35% by 2050, reducing annual demand for primary chemicals by 116 Mt.11 For chemical producers, that means greater access to secondary feedstocks and less dependence on virgin feedstock markets and their fluctuations. For customers, it opens up more ways to meet their recycled-content and circularity targets.

The EU Packaging and Packaging Waste Regulation brings requirements for material reduction, recyclability, recycled content and reuse into one framework, giving the packaging value chain clearer direction on where to invest. Other chemical-dependent sectors can follow. Pharmaceutical companies, for example, can begin with packaging even where strict requirements around safety, sterility and product stability limit immediate changes elsewhere.

Making circularity part of wider transition planning is an important starting point. Mapping material flows can show where valuable materials are lost and where virgin inputs contribute to emissions. This helps decide where to act first, whether by redesigning a product, cutting material use or setting up take-back systems.

Product design innovation also has a role to play. Simpler material combinations, fewer additives that restrict recycling, and products built to be repaired or disassembled all help materials retain their quality and value.

Greater alignment around these design choices could make products easier to identify, sort and recover across entire markets, although this may involve trade-offs between simplifying materials for recovery and retaining their specialised performance in some applications. Digital product passports could record composition, helping collectors and recyclers understand what products contain and how their materials can be separated or recovered.

Investment is also needed in physical collection, sorting, recycling and recovery systems capable of supplying secondary materials at the quality, consistency and scale chemical producers need. Chemicals-as-a-service models could create a continuing commercial interest in materials after they enter the market, strengthening incentives to track, recover and return them to productive use.

Milestones for secondary plastics production

Secondary production must rise from 8% to 35% of plastics production by 2050 as part of a Net Zero pathway.

Source: IEA

SHIFTING MARKET DEMAND

4. Markets do not consistenty reward lower-carbon products

Even though it is frequently referred to as ‘the mother of all sectors’, the chemicals industry remains largely out of sight for consumers. In practice, investments in lower-carbon feedstocks and products, or circular, energy-efficient processes are often far removed from the purchasing decisions that determine market success.

Most procurement decisions are based mainly on price rather than a mix of price and quality.12 In pharmaceuticals, for example, while the weighting of economic factors more than doubled in tenders between 2011 and 2020 due to short-term budget constraints, environmental requirements remain low on the agenda, with only 7% of pharmaceutical tenders across France, Germany, Italy, Spain and the United Kingdom referring to ESG criteria.13

Purchasing and regulatory requirements further shape market demand. In highly regulated markets such as pharmaceuticals, medical devices and food-contact materials, environmental performance can receive less attention than non-negotiable requirements around safety, efficacy and product performance. As a result, lower-carbon products often compete for attention against an established set of criteria that buyers cannot compromise on.

These challenges are intensified by the difficulty of distinguishing lower-carbon products from conventional ones. Carbon footprints, allocation methods, and accounting methodologies vary widely among suppliers, making direct comparisons challenging. Buyers may struggle to identify and reward products that deliver lower emissions, limiting the impact of climate performance on purchasing decisions and leaving lower-carbon products largely invisible in the market.

Prevalence of economic criteria vs. mixed criteria

EU5 pharmaceutical procurement decisions are driven by cost rather than mixed criteria, which include technical, logistic or environmental requirements.

Source: ISPOR, 2022

The shift to transparent markets

To increase the commercial case for lower-carbon chemicals and their end-products, the market must create demand signals that allow chemical products to be judged on more than cost alone.

As long as cost remains the primary driver for tenders, regulation must help level the playing field, discouraging customers from sourcing chemicals from countries with less stringent environmental requirements while incentivising defossilisation.

We’re already noticing early shifts in regulation. The EU’s Carbon Border Adjustment Mechanism has placed a carbon price on imports of hydrogen and nitrogen-based fertilisers, increasing the cost of carbon-intensive ammonia production.14

Governments can also create guaranteed demand via mandates, as seen with the EU’s Packaging and Packaging Waste Regulation. By enforcing circular design and waste reduction, the new mandate creates a market for circular packaging. Manufacturers gain a guaranteed baseline of demand, reducing some of the commercial risk attached to investment.

But regulation alone won’t unlock demand. Buyers can only reward lower-carbon products they can identify and compare, so transparency, traceability and trusted claims are essential for buyers to send a clear market signal.

Some large buyers are already beginning to signal demand for lower-carbon products, even in hard-to-decarbonise sub-sectors like pharmaceuticals. France’s national health system has introduced a mandatory carbon score on medicines, requiring manufacturers to share the carbon impact of their medicines. The UK’s NHS blocks large suppliers without a clear carbon reduction plan from bidding on future medicine tenders.15 Pharmaceutical companies are beginning to pass similar expectations down to their own suppliers, with 11 of 25 leading companies requiring supplier to have science-based targets in place.16 These are still early signals, but in each case, suppliers are expected to measure and disclose their emissions.

Chemical companies that provide clear and trustworthy carbon information are likely to benefit the most from these new demands. Using standard methodologies and independently assured product carbon footprints gives buyers a credible basis to compare products that might otherwise look the same. Clear labelling can make improvements in carbon performance visible while traceable evidence can back up climate claims.

Consistent carbon data can flow through the whole value chain, enabling demand for lower-carbon products to follow. Buyers can ask for it in tenders and specifications, chemical companies can make product carbon footprints routine across their portfolios, and policymakers can align the standards behind them so that footprints from different suppliers can be compared like for like.

Just as safety, quality and performance have become established purchasing criteria, carbon performance can increasingly shape buying decisions.

The market potential

25 Mt

Of recycled flexible packaging material needed by 2030 to meet PPWR targets.

Source: CEFLEX

10-20%

Of scoring criteria in France's public healthcare scoring will come from environmental evaluations.

Source: Inedit

2030

The year the NHS will stop working with suppliers that do not have a carbon reduction plan.

Source: NHS England

"Carbon performance alone isn't enough to win contracts right now. But as it becomes part of procurement rules and long-term agreements, the companies that invested early will be better placed to compete.”